Business rescue

Business rescue can be initiated in one of two ways:

• Whereby the company's board of directors passes a resolution by a majority vote to commence business rescue proceedings in respect of the company concerned, provided that the board has reasonable grounds to believe that the company is financially distressed and that there is a reasonable prospect of rescuing the company. It must be noted that the board of directors cannot pass a resolution to commence business rescue proceedings where steps to liquidate the company have already been initiated.
• An "affected person" may apply to court for an order placing the company in business rescue. An "affected person" includes a creditor of the company, a shareholder, a registered trade union representing the company's employees and the individual employees themselves.

For an order to be granted, the affected person must satisfy the court that the company is financially distressed or has failed to pay any amount due in respect of employment-related matters, or that it is otherwise just and equitable to commence the business rescue proceedings and that there is a reasonable prospect of rescuing the company. 

Liquidation

A voluntary liquidation can be commenced through a special resolution by the company's members or creditors.

A compulsory liquidation is initiated through an application to a competent court, accompanied by an affidavit. This type of application is typically brought by a creditor. However, the company itself, one or more of its members and the master of a competent court all have the requisite standing to bring such an application.

Compromise (creditors' scheme of arrangement)

The board of directors or the liquidator appointed to wind up a company.

Business rescue

No. However, a shareholder is an "affected person" and may therefore commence business rescue proceedings.

Liquidation

This depends on the type of liquidation process being followed. Where liquidation proceedings are initiated voluntarily by the company, the shareholders will have to pass a special resolution placing the company in liquidation. 

Compromise (creditors' scheme of arrangement)

No

Business rescue

Generally, no.  

Liquidation

Yes, by way of an application to the high court.¹

Compromise (creditors' scheme of arrangement)

No, voting would need to take place at the level of each company within the group.

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1. See for example, Allers and Others v. Fourie No and Others (491/05) [2006] ZASCA 152 (21 September 2006).

Business rescue

There will only be court involvement for compulsory business rescue proceedings, whereby an "affected person" makes an application to a competent court to place the company in business rescue.

Liquidation

Yes. A court with jurisdiction may place a company in liquidation where an interested party has made an application to a competent court in this regard, regardless of whether the company is solvent or insolvent.

Furthermore, there will be court involvement in certain scenarios, such as if the liquidator wishes to recover assets that were disposed of prior to the liquidation proceedings and that should not have been disposed of.

Compromise (creditors' scheme of arrangement)

Yes, if the proposal is approved by the creditors voting at the creditors meeting(s), then the company may apply to the court to sanction and approve the proposal, thereby making it final and binding on all of the company's creditors or all members of the relevant class of creditors.

The court may sanction the compromise as set out in the adopted proposal, if it considers it just and equitable to do so, having regard to the following:

• The number of creditors of any affected class of creditors, who were present or represented at the meeting, and who voted in favor of the proposal
• In the case of a compromise in respect of a company being wound up, the report of the Master of a competent court on suspected contraventions or offenses and whether or not any director or officer, or past director or officer, of the company is or appears to be personally liable for damages or compensation to the company or for any debts or liabilities of the company.  

Business rescue

The business rescue practitioner and the board of directors of the company, provided that any action is authorized by the business rescue practitioner. 

If the board of a company has commenced business rescue proceedings, the company must then (within five days of the commencement of business rescue proceedings) appoint a suitable business rescue practitioner. 

Where an "affected person" commences business rescue proceedings through a court application, the relevant person bringing the application will, in the application itself, propose a suitable business rescue practitioner, and the court will make the appointment part of the proceedings. 

The business rescue practitioner will then effectively take over the management and control of the company and the company will henceforth only be able to proceed with any substantial process or action with the approval of the business rescue practitioner.  

The business rescue practitioner will have the usual fiduciary duties that any other director of the company will have. In addition, the fiduciary duties of the directors of the company in business rescue will persist throughout the business rescue process. The directors will be able to act as such provided that their actions are authorized by the business rescue practitioner. 

The company's creditors and securities holders are entitled to participate in the business rescue proceedings. The business rescue practitioner will provide sufficient information to all affected parties to enable them to participate in the business rescue proceedings.

The voting creditors will also be provided with the proposed business rescue plan, which will contain the business rescue practitioner's proposal on how the company will be nurtured back to financial health and on which plan they will eventually vote. 

Further to the above, creditors can also establish a creditors' committee to assist the business rescue practitioner. 

The liquidator. 

The liquidator's primary obligation is to see to the winding-up of the company. This requires the liquidator to do the following:

• Take possession of the company's assets
• Realize such assets 
• Apply the proceeds toward the payment of the costs of the liquidation proceedings as well as to the creditors in their order of ranking and to thereafter distribute what is left over to the members of the company

Therefore, the company's property will be in the custody of the liquidator from the date of his/her appointment. The liquidator holds a fiduciary responsibility to the company, its members and its creditors, and must therefore act in their collective best interest. 

Whilst the debtor company does not lose its corporate identity or title to its assets, from the effective date of the winding up, the powers of the directors cease and the board would no longer have any power to manage the company. However, in a voluntary winding-up, the liquidator, creditors or members may sanction a continuance of directors' powers. 

Transparency is essential for liquidation proceedings, especially because there is a risk of contribution from certain creditors if there are insufficient funds or assets available to cover the costs of the administrative expenses of liquidation.

In terms of the 1973 Companies Act, the Master of a competent court must give notice of such liquidation proceedings in the Government Gazette upon receipt of a copy of any winding-up order lodged with them. Where there has been a voluntary winding-up of an insolvent company, the company must, within 28 days after the registration of that resolution, lodge a copy of the resolution with the Master of a competent court and give notice of the winding-up in the Government Gazette. 

Furthermore, to provide for continued transparency and disclosure throughout the process, regular creditor and member meetings must be held. 

In addition to the above, in terms of the Insolvency Act, 1936 ("Insolvency Act") the liquidator must, within six months of being appointed, submit to the Master of the court a liquidation and distribution account of the property in the estate available for payment to creditors.

Compromise (creditors' scheme of arrangement)

This depends on whether or not winding up (liquidation) proceedings have been commenced in respect of the company. If no such proceedings have been commenced, then the board of directors will continue to manage the company, whereas if the company is in the process of being wound up (whether solvent or insolvent), the liquidator will take control of the business and the board of directors would no longer have the power to manage the company unless, in a voluntary winding-up, the liquidator, creditors or members sanction a continuance of directors' powers. 

Business rescue

The company's creditors and securities holders are entitled to participate in the business rescue proceedings. The business rescue practitioner will provide sufficient information to all affected parties to enable them to participate in the business rescue proceedings.

The voting creditors will also be provided with the proposed business rescue plan, which will contain the business rescue practitioner's proposal on how the company will be nurtured back to financial health and on which plan they will eventually vote.

Further to the above, creditors can also establish a creditors' committee to assist the business rescue practitioner. 

Transparency is essential for liquidation proceedings, especially because there is a risk of contribution from certain creditors if there are insufficient funds or assets available to cover the costs of the administrative expenses of liquidation.

In terms of the 1973 Companies Act, the Master of a competent court must give notice of such liquidation proceedings in the Government Gazette upon receipt of a copy of any winding-up order lodged with them. Where there has been a voluntary winding-up of an insolvent company, the company must, within 28 days after the registration of that resolution, lodge a copy of the resolution with the Master of a competent court and give notice of the winding-up in the Government Gazette. 

Furthermore, to provide for continued transparency and disclosure throughout the process, regular creditor and member meetings must be held. 

In addition to the above, in terms of the Insolvency Act, 1936 ("Insolvency Act") the liquidator must, within six months of being appointed, submit to the Master of the court a liquidation and distribution account of the property in the estate available for payment to creditors.

There are significant disclosure obligations to the company's creditors. All creditors that would be affected by the proposed arrangement or compromise, irrespective of the nature of their claims against a company, must be provided with a full and proper explanation in respect of, the proposed scheme. Where the winding-up process has been commenced and the proposed scheme involves the setting aside of the winding-up order or proceedings, the disclosure should, to the extent possible, inform creditors of the dividends that they are likely to receive in terms of the proposal in contrast with those they are likely to receive if the winding-up process were to be completed.

If the scheme includes an acquisition of shares in the company, the information provided to the shareholders and/or creditors should include the price at which the purchaser would obtain shares in the company.

If the company is listed on a securities exchange, additional disclosure requirements may apply.

The processes described under the Companies Act are available only in relation to companies incorporated or registered under the South African Companies Act, including profit, nonprofit, state-owned (where registered in terms of the 2008 Companies Act) and personal liability companies. Some state-owned entities are governed by their own legislation, and that particular legislation will dictate their winding-up. A trust or a partnership that does not constitute a company for purposes of the 2008 Companies Act cannot be liquidated or placed into business rescue. Rather, where a trust or partnership is insolvent, it (or, more correctly, the estates of the trustees/partners) will be sequestrated in accordance with the Insolvency Act, which applies to inter alia all natural persons and unincorporated associations.

In terms of the Insurance Act, 2017, insurance companies may be placed in business rescue or liquidation in terms of the provisions of the 2008 Companies Act, subject to certain specifications. For example, for both business rescue and liquidation proceedings, the Prudential Authority (a regulatory body established in terms of the Financial Sector Regulation Act, 2017) may make an application to a competent court to place an insurance company in business rescue or to have it wound up. Furthermore, a competent court may only grant an order placing an insurance company in business rescue or liquidation if the Prudential Authority has been notified of such. 

The insolvency provisions under the Companies Act are modified by the Banks Act, 1990 in relation to companies that are registered banks. In terms of the Banks Act, the Prudential Authority is entitled to make an application to a competent High Court for the liquidation of a registered bank; and to oppose any application made by another person to have a bank wound up. In terms of the Banks Act, 1990, the Prudential Authority is entitled to apply for the liquidation of any entity that fails to comply with a repayment directive issued by the Registrar of Banks pursuant to the entity conducting the business of a bank in contravention of the Banks Act, 1990. Further, only a person recommended by the Prudential Authority may be appointed as a bank's liquidator. The Banks Act also allows the minister of finance (in consultation with the Prudential Authority) to place a bank under curatorship. While not excluded from the provisions of the Companies Act, additional special regulations apply to certain regulated entities operating in the financial sector (under the Financial Sector Regulation Act, 2017).

Business rescue

A creditor may only initiate business rescue proceedings by making an application to a court with the requisite jurisdiction. Unless an urgent application can be justified, the ordinary court procedure may take between 6 and 12 months to complete.

Liquidation

A creditor may commence liquidation proceedings in one of two ways, namely by special resolution of the shareholders of the company providing for a winding up by the company's creditors or by way of application to court. Depending on the approach adopted, the time will vary.

An application to a court to place a company in liquidation may take between six and 12 months. On the other hand, a voluntary liquidation simply requires the shareholders to pass a special resolution and then to register the resolution, among other things, with the Companies and Intellectual Property Commission, and is therefore envisaged to take approximately one to two months to initiate.

Compromise (creditors' scheme of arrangement)

This is generally not applicable. Although a creditor may make a proposal to the company, the board of directors or liquidator of the company would be required to submit the proposal to its creditors and the commission. No notice period is prescribed for creditors' meetings to be called. However, it has been suggested that (as a minimum) notice periods should comply with the minimum notice period prescribed for shareholder meetings (at least 10 business days).